Take Control: Creditors’ Voluntary Liquidation

The term “liquidation” often evokes images of financial distress and company dissolution. It also suggests failure, but it’s not always as clear cut as that.

In fact, not all liquidations are equal, and one avenue that provides a structured and controlled approach to winding up a company is known as Creditors’ Voluntary Liquidation (CVL).

In the United Kingdom, this legal process allows directors and stakeholders to take control of the situation, ensure a fair distribution of assets, and navigate insolvency issues responsibly.

 

 

Understanding Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation is a formal insolvency procedure that allows a company to wind up its affairs voluntarily.

Unlike Compulsory Liquidation, which is forced upon a company by external creditors through a court order, a CVL is initiated by the company’s directors and shareholders.

It is a responsible way to close down a business when it can no longer pay its debts as they fall due.

In a Creditors’ Voluntary Liquidation, the company’s assets are liquidated, and the proceeds are used to pay off its creditors in a structured and legally mandated order of priority.

Any remaining funds, if available, are distributed among the shareholders. The company is then formally dissolved, bringing an end to its legal existence.

 

 

When is a CVL Initiated?

A Creditors’ Voluntary Liquidation is typically initiated when a company faces insurmountable financial difficulties, such as an inability to meet its financial obligations, accumulating debts, or declining business prospects.

Directors have a legal obligation to act in the best interests of the company and its creditors when the company becomes insolvent.

If they believe that the company cannot be rescued or continue trading profitably, they may consider a CVL as a responsible course of action.

Common scenarios that may lead to the initiation of a Creditors’ Voluntary Liquidation include:

• Inability to Pay Debts: When the company is unable to meet its financial obligations as they fall due, including payments to suppliers, employees, or tax authorities.
• Accumulating Debts: When the company’s debts are increasing, and there are no realistic prospects for returning to profitability.
• Loss of Key Contracts or Customers: If the company relies on a few key contracts or customers, the loss of one or more of them can lead to financial distress.
• Declining Market Conditions: If the company operates in an industry facing adverse economic conditions or significant regulatory changes, it may struggle to survive.
• Legal Actions by Creditors: When creditors take legal action against the company, such as serving a winding-up petition, it can be a sign that a CVL is necessary.
• Shareholder Decision: In some cases, shareholders may decide that it is in their best interests to wind up the company and distribute its assets.

A CVL usually costs from around £5,000+VAT and this can be paid for from the sale of any assets or the director may have to fund the cost from their own pocket

Read – How To Liquidate a Company That Has No Money

 

Creditors’ Voluntary Liquidation – How it works

The process of initiating a CVL involves several key steps, and it must adhere to the regulations outlined in the Insolvency Act 1986 and the Insolvency Rules 2016.

Here is an overview of the typical process:

 

1. Find a Licensed Insolvency Practitioner (IP)

The first step is to find a licensed Insolvency Practitioner (IP) to act as the Liquidator. The IP will oversee the entire liquidation process, ensuring it complies with UK business law and that creditors’ interests are protected.

 

2. Shareholder Resolution

A meeting of the company’s shareholders is called, during which they pass a special resolution to wind up the company and the intention to appoint the IP as the Liquidator. This resolution must be passed by at least 75% of the shareholders by value.

 

3. Notification of Creditors

Once the special resolution is passed, the directors must notify all known creditors of the company’s intention to enter into a CVL. The IP will normally do this.

 

4. Meeting of Creditors

A creditors’ meeting is held within 14 days of the shareholders’ meeting. During this meeting, creditors have the opportunity to appoint a different Liquidator if they choose to do so. If the creditors are fine with it the IP is formally appointed to carry out the liquidation.

 

5. Realisation of Assets

The Liquidator takes control of the company’s assets, including its books and records, and begins the process of selling them. The proceeds are used to pay off creditors in a legally prescribed order, with secured creditors having the highest priority.

 

6. Reporting to Creditors

The Liquidator must provide regular reports to creditors, detailing the progress of the liquidation and the amounts realised from asset sales.

 

7. Distribution of Funds

Once all assets have been realized and any legal disputes or challenges have been resolved, the Liquidator distributes the available funds to creditors in accordance with the statutory hierarchy.

Secured creditors are paid first, followed by preferential creditors (e.g., employees owed wages and certain taxes), and finally, any remaining funds are distributed to unsecured creditors.

 

8. Dissolution

Once all debts have been paid or settled to the best extent possible, the company is formally dissolved, and its legal existence ceases.

 

Benefits of Creditors’ Voluntary Liquidation

A Creditors’ Voluntary Liquidation offers several benefits compared to other insolvency procedures:

• Controlled Process: Directors and shareholders retain control over the initiation of the liquidation process, helping to protect their interests and make informed decisions.
• Fair Treatment of Creditors: A CVL ensures a fair and orderly distribution of assets among creditors, following a statutory hierarchy.
• Reduced Personal Liability: Directors are protected from personal liability for the company’s debts, provided they have acted responsibly and sought professional advice when needed.
• Reduced Risk of Legal Actions: By voluntarily entering liquidation, the company reduces the risk of legal actions, such as winding-up petitions, which can be initiated by external creditors in Compulsory Liquidation.
• Structured Wind-Up: A CVL provides a structured and transparent process for winding up the company, helping to minimize disputes and legal complications.

In the world of UK business law, a Creditors’ Voluntary Liquidation stands as a responsible and structured approach for companies facing insolvency.

It empowers directors and shareholders to take control of a difficult situation, ensuring a fair distribution of assets to creditors while minimizing personal liability.

Understanding the process and adhering to legal requirements is crucial when considering a CVL, as it not only protects the interests of stakeholders but also upholds the principles of responsible business management in the face of financial adversity.

It’s important for any company facing financial distress to seek professional advice from qualified insolvency practitioners to determine the most appropriate course of action, whether it be a CVL or an alternative solution.

 

Need advice on a Creditors’ Voluntary Liquidation?

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